Will History Repeat Itself?

The unexpected election of Donald Trump as the United States’ 45th President has caused much head scratching. A number of factors have been put forward to explain his electoral success, ranging from aloof elites to dumb voters. But the most realistic arguments concern how the combined effects of globalization, technological change, and changes in government policy caused “deindustrialization” across a wide swath of the United States. It has been especially pronounced in what is referred to as the “rust belt” – a region stretching from Pennsylvania, New Jersey, and New York State westward towards Wisconsin.

Deindustrialization is responsible for making good paying manufacturing jobs requiring low to medium skills scarce, eviscerating the middle class in certain regions, and stoking political resentment. Undoubtedly, neoliberal policies since the Reagan era have contributed to massive off-shoring of production to developing countries, chiefly Mexico and China. Yet, rapid technological development has also played a major role: automation replaced exactly those skill-sets most prevalent in U.S. manufacturing before 1980.

U.S. workers have thus been pressured from two sides. As skill-biased technological change began to displace many workers, China entered the global capitalist system and transformed into the factory of the world. Employment in U.S. manufacturing decreased by five million after 2000, yet overall manufacturing output actually increased during this time. The United States remains the second largest manufacturer globally (now after China).

Adding to the stresses felt by American blue-collar workers were government policies that diminished social support systems, lower union membership in emerging industries, and a large wave of new immigrants. This loss of good paying jobs to off-shoring and technological change is not just an American story. It has occurred in most advanced industrial economies. As evidenced by Brexit, nationalistic and isolationist populism that seeks to roll back globalization, especially large-scale immigration and free trade, is growing throughout the developed world.

While the developed economies have mostly completed this transition, the perhaps biggest beneficiary of globalization, China, is now entering its early stages. Already rising labor costs and greater regulatory oversight are squeezing Chinese manufacturers. Some low-end assembly in industries such as textiles and apparel are moving offshore in search of lower wages and more permissive environments. Will China face the same rapid deindustrialization and concomitant social displacement that has stoked political resentment in the United States?

The challenges certainly are similar in nature, but history is unlikely to repeat itself. The Chinese government is only too aware of how industrial hollowing-out could arrest economic development and plunge the country into the middle-income trap. According to the World Bank, only 13 of 101 middle-income economies in 1960 had become high-income economies by 2008.

To avoid this trap, China has put forward a series of policies that simultaneously seek to foster a better allocation of capital, industrial innovation, continued urbanization, and a consumer-oriented model of economic growth. At the center of these policies stand efforts to actively counter deindustrialization with programs fostering industrial restructuring and upgrading.

On one hand, the catch-all phrase "supply-side reforms" is being employed to address China’s biggest challenge: massive industrial overcapacity in mostly state-owned heavy industries, such as steel and aluminum. On the other is a master plan made public in 2015 entitled “Made in China 2025.” This plan is modeled on similar plans in advanced industrial economies, especially Germany’s Industrie 4.0 (industry 4.0) strategy. China’s aim is to take advantage of the “Second Machine” age by moving its manufacturing industry into advanced automation, digital systems of factory management, and the “Internet of things.”

Put together, these policies envision a fundamental transformation of Chinese industry. Lumbering and polluting heavy industries as well as labor-intensive “sweat shops” should be replaced by indigenous innovation and manufacturing focusing on ten priority sectors, including robots, new materials, additive manufacturing, big data, and other advanced manufacturing and IT sectors.

One of the biggest challenges concerns old industries. In China, as was the case in the United States, many towns rely on one or just a few companies for the majority of employment and income. Such company towns are especially common in Northeastern and Northern Chinese provinces, such as Henan, Hebei, Shanxi, and Liaoning. As uncompetitive and polluting “zombie” enterprises are gradually shut down, these cities are likely to see big social dislocations.

Estimates have put the number of workers who will lose their jobs at five to six million over the next two to three years alone. However, the Chinese government is adamant about preventing mass layoffs, and therefore is likely to provide fiscal resources to local governments for retraining, pension payments, and other social support programs. The Chinese government also has ruled out a policy of mass-privatization. The state wants to control the process of closings and restructurings to be socially and economically viable.

“Made in China 2025” focuses on the brighter side of China’s impending transition. It seeks to restructure production to become more socially and environmentally sustainable. As China faces a major demographic transition that will shrink its labor force, the slogan “robot replaces man” has become prominent. China is likely to be the largest user of industrial robots by 2018, overtaking Japan, Korea, the United States, and Germany. The bet is simple: if China can employ its increasingly higher skilled workers besides an army of robots, it would create a better labor force than either human or robot alone. China could retain its dominance in manufacturing and branch into mixing robots with other automation technologies, like 3D printing and Artificial Intelligence.

Chinese entrepreneurs are also rapidly developing a domestic robotics industry. Most producers still lag behind top global manufacturers in sophistication, but they are catching up. Moreover, the take-over by Guangdong’s Midea, a white goods maker, of the German robot manufacturer Kuka shows how some Chinese firms can simply buy advanced technology.

Given continuing labor shortages, especially in the coastal export provinces, the hope is that this lurch towards automation, digitization, and innovation will not cause massive social dislocations. Midea, for example, is aiming to cut its assembly work force for white goods by 60-80 percent, and move into higher value added activities. However, a missing plank is how to rapidly retrain a whole generation of workers with new skills. The workers of the “Second Machine” age will be fewer, but they will have to be much better qualified.

Just like everywhere else, there will be considerable social costs that will accompany China’s industrial transformation. Nonetheless, the country has several advantages that will differentiate its experience from that in the United States. First, there are by now numerous examples of countries that have managed this transition quite well, such as Germany. Chinese plans are consciously modeled on these examples. Second, and directly following from this, there is a plan. Even if highly imperfect, the Chinese government has laid out a roadmap to foster new industries while at the same time shrinking and restructuring old ones. Third, the Chinese Communist Party fears social unrest above all else. Heavy government subsidies to lessen the shock of the transition are likely to be employed. Moreover, China’s heavy industry is unlikely to move offshore, but rather face a reduction in capacity and increase in mechanization. Not all jobs will be lost.

Finally, China has time and size on its side. It is already the largest global manufacturer with a rapidly growing internal market. The dynamism of its manufacturing system has enabled considerable technological upgrading, with some industries developing cutting-edge technology, such as high-speed rail, solar panels, and ship-building. And since China has few limitations on redeploying labor, the employment of robots and other labor-saving technologies faces little opposition.

This does not mean that there will not be large social dislocations and even local unrest. But the transition will be managed top-down with a wide array of tools and the benefit of prior experiences. The dynamics will thus be different from the United States: only some low-skilled labor intensive production processes will be offshored, while higher value-added activities will adamantly be kept onshore.

Added on to this are heavy restrictions on low skilled immigration and a rapidly declining labor force. All of these factors create a rather different picture. The types of local deprivation seen in the United States and fueling Donald Trump's election success are likely to be less common. China will chart a unique course, encountering new pitfalls and opportunities in its industrial transition.